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Hong Kong’s Office Space ‘Crisis’

The business district of Central is pictured in Hong Kong, China on Oct. 11, 2012.

Companies seeking office space in Hong Kong are all dressed up, with nowhere to go.

Despite its punishingly high rents, the city remains a highly desirable spot for international businesses looking to set up shop at the foot of the world’s second-largest economy. The only problem: There isn’t enough space for them all, according to a report released Tuesday by Daiwa Capital Markets and property consultant CBRE.

By 2020, they estimate, the city will be short some 9 million square feet of office space, or the equivalent of 207 acres, assuming a 4% annual growth rate for the business services sector.

“We’re hitting a crisis point,” says Craig Shute, CBRE senior managing director for Hong Kong, Macau and Taiwan. While the city is notorious for its tight housing supply, he says, the issue is pronounced in the office sector as well.

Already, the city has seen an impact from the lack of quality, affordable space, says Nick Axford, CBRE’s head of research for Asia-Pacific. “Right now, every occupier is saying, ‘If I don’t have to put someone into Hong Kong, I won’t,’” he says.

The government has noted the lack of available office space, and recently announced its intention to create a “CBD2,” or business district, in Kowloon East, where it plans to redevelop some of the area’s aging industrial lots. However, a number of areas the government has targeted for development will require a significant period of time before they become viable, says CBRE—involving, among other things, the need to relocate existing industrial structures, resolve existing ownership structures, establish new transport systems and more.

Currently, the city is on track to produce 8 million square feet of office space by the end of the decade, less than half of what CBRE predicts is necessary to meet projected need. To remedy the shortfall, CBRE has recommended seven sites that can be fast-tracked through the development process and be completed by 2020, including 6 million square feet of government-held land located in East and West Kowloon.

In recent days, since Hong Kong slapped a 15% stamp duty on non-locals seeking to buy residential property over the weekend, speculation has been rife that the new tax will push investors into the commercial sector instead, helping further drive up prices. But on Tuesday, Patrick Wong, regional sales director for Centaline Property Agency, said he was skeptical of whether the policy would have much impact on the city’s office market.

“Some [investors] will come take a look, but people aren’t too familiar with the market,” he says. The amount of money needed to invest in such properties can also be prohibitive for many, says Mr. Wong, who handles office transactions on Hong Kong island for the company.

Wong Leung-sing, who heads Centaline’s research division, says he expects office rents in Hong Kong—already the most expensive in the world—will continue gradually rising, thanks to Hong Kong’s desirable location and business environment. Rents will rise “because supply is limited, and because economic activity is still in a good situation,” not because of the stamp duty, he says.